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Producers Cut Budgets, Drilling as Market Spirals Downward

October 13, 2008
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As the stock market suffered its eighth straight day of losses Friday and the Dow flirted with the 8,000 mark, several more domestic oil and natural gas producers reported that they were cutting their planned capital expenditures (capex) for the rest of the year and/or 2009 and were rolling back their drilling programs or postponing planned acquisitions in order to preserve capital liquidity. Producers said they also had taken steps to shore up their bank credit lines.

The latest to trim capex budgets were Quicksilver Resources, Equitable Resources, Denbury Resources, ATP Oil & Gas Corp, and PetroQuest Energy Inc. They joined the rapidly expanding roster of other budget cutters, including Chesapeake Energy Corp. (see NGI, Sept. 29), Petrohawk Energy Corp. (see NGI, Oct. 6a), Penn Virginia Corp. (see NGI, Oct. 6b) and Oklahoma-based SandRidge Energy Inc.

Fort Worth, TX-based Quicksilver Resources said it was cutting its capex spending for the fourth quarter by about $100 million and anticipated a slimmer capital program of $850 million in 2009, which includes an estimated $100 million of midstream spending to be funded equally by Quicksilver Resources and Quicksilver Gas Services LP.

"We are scaling back our capital investment program to a level that will approximate our projected cash flow," said Quicksilver CEO Glenn Darden. "We expect to generate annual production growth of more than 25% in 2009, even at these reduced capital levels. With Quicksilver's low-cost structure and its significant price protection through hedging, the company expects to generate cash margins of roughly $5/Mcfe of gas produced."

Quicksilver said it was reducing the number of drilling rigs working in the Fort Worth Basin to nine from the current 14 during November, and expected to drill about 175 net wells in the basin next year. More than half the rigs will operate in Tarrant and Denton counties and the rest will operate in Hood, Somervell and Hill counties, the oil and natural gas producer noted.

The producer said average daily production volumes were now projected to be about 260-270 MMcfe/d this year and increase by more than 25% to 340-350 MMcfe/d in 2009. Due to shut-in production in the wake of hurricanes Gustav and Ike, third-quarter production volumes were expected to average 270-280 MMcfe/d, down by about 10 MMcfe/d from what was previously anticipated. But Quicksilver Resources is more upbeat about the fourth quarter, expecting average production of 325-335 MMcfe/d -- 20% more than in the third quarter.

Despite the twin hurricanes and the upheaval in the credit and financial markets, the company said it anticipated a 75% growth in production this year, excluding the effect of the divestiture of its Northeast operations in November 2007.

The company previously announced that its borrowing base was increased to $1.2 billion on its $1.45 billion credit facility. It said it had approximately $434 million of liquidity from the credit facility at the end of September.

Also caught in a liquidity crunch is Dallas-based Denbury Resources, which last Wednesday announced that it canceled a planned $600 million acquisition. Denbury agreed to acquire the Conroe field, located north of Houston, in August from a privately owned company. Closing was expected early this month, and Denbury was to have financed the acquisition in part through an increase to its bank credit line, as well as by selling some Barnett Shale properties in North Texas.

"We wanted to address the potential liquidity concerns affecting all public companies at the moment," Denbury CEO Gareth Roberts told energy analysts during a conference call Wednesday. "Firstly, we have an increased commitment from our banking group, and we currently have more than $100 million of cash on hand...Previously we announced the Conroe field acquisition, but we have decided not to pursue it at this time."

Roberts explained that Denbury would forfeit a $30 million deposit on the Conroe field, but "with the credit markets collapsing, Denbury thought it was not prudent to spend $600 million on the field at this moment. We would still like to acquire it at some point in the future."

Denbury, which finances its exploration program with cash on hand, also has reduced its budget for 2009. "We're doing a 'worst case scenario' for 2009, but to be honest, there may be a lot of savings in our budgeted forecast," Roberts said. In addition, "we have the option to increase [the 2009 budget] significantly if cash flow allows...We want to push some of our costs into 2010, when the capital expenditure requirements are expected to be significantly less."

Denbury said it has set a preliminary base capital budget of $825 million for 2009 (excluding the purchase of the Conroe field), but it may augment it if commodity prices become more favorable.

The producer said it has more than doubled its liquidity to $750 million via an amendment to its bank credit facility, and it maintains a borrowing base under the facility of $1 billion. Denbury noted that it has nothing drawn on the company's bank credit line.

Lafayette, LA-based PetroQuest Energy reported that 1.2 Bcfe of net production was deferred from the third quarter as a result of the downtime cause by the twin hurricanes. The producer said most of its Gulf Coast properties have been restored. It is currently producing approximately 100 MMcfe/d, with an additional 6.5 MMcfe/d of Gulf Coast production shut in from storm damage.

Because of the hurricanes, PetroQuest Energy said it expects third-quarter production to be in the range of 86-90 MMcfe/d, and sees the remaining shut-in production being restored either in the fourth quarter of 2008 or first quarter of 2009.

Citing lagging gas prices, the company said it has cut back its capex program for the remainder of the year. While so far this year PetroQuest has expanded its acreage position in the Woodford Shale in Oklahoma's western Arkoma Basin by about 65%, it said it expected to scale back its leasing efforts for the rest of the year. It also has deferred the drilling of several East Texas and other Gulf Coast projects to 2009.

With a smaller program, PetroQuest estimates that its capital expenditures this year, excluding acquisitions and capitalized interest and overhead, will range from $265 million to $285 million.

To help finance its future projects, the company announced that it closed on a $300 million bank credit facility. The credit facility provides an initial borrowing base of $150 million, which represents a $55 million increase from its previous facility, PetroQuest said.

"Our strong growth in reserves from our diversified portfolio of assets was recognized by the group of banks that forms our new credit facility. We continue to forecast reserve growth in excess of 40% during 2008 from the drill bit alone, while remaining mindful of liquidity as we navigate the effects of the global economy on our business," said PetroQuest CEO Charles T. Goodson.

Pittsburgh-based Equitable Resources Inc. said Wednesday it plans to cut its capex spending from an estimated $1.4 billion this year to about $1 billion or less in 2009. Nevertheless the producer said it still expected to maintain sales growth of up to 20% a year in the long term. It reported it has achieved its year-end production target for the current year of 235 MMcfe/d.

Equitable Resources said its capital spending plan is built on the premise that it will not tap capital markets through 2010, the Associated Press said.

ATP Oil & Gas, a Gulf of Mexico and North Sea producer, said it intended to cut its capex budget by more than $200 million for the rest of the year and 2009. "Based on the current economic and financial climate, we believe it is prudent to reduce our remaining capital expenditures...We completed our most recent financing in June of this year, which provided us the strength and flexibility to withstand these volatile markets," said ATP CEO T. Paul Bulmahn.

"ATP has completed its development plans at High Island A-589 and South Marsh Island 190, and both projects should be [in] production this quarter. Moreover, our development plans for Morgus and Mirage in the Gulf of Mexico and Wenlock in the North Sea are progressing on schedule, and those projects should add new production in 2009. Accordingly, we expect to grow production and cash flow in 2009. The reduction in capital expenditure budgets will impact production in the latter part of 2010 and beyond."

Oklahoma City, OK-based Devon Energy Corp. last Monday revised its third-quarter and fourth-quarter oil and gas production forecasts, but it did not say it was cutting its capex budget. It now projects that the companywide production for the third quarter will be 59 MMboe, down from its previously forecast 61 MMboe. About two-thirds of the reduction is attributable to the U.S. hurricanes and typhoons in the South China Sea. The weather-related reduced volumes are roughly 40% oil and 60% natural gas, according to Devon, the largest U.S.-based independent producer.

As for the fourth quarter, the producer said it expects to produce 61-62 MMboe, down from its prior projection of 64 MMboe. Most of the reduction in production volumes is hurricane-related, and is evenly split between oil and gas.

To date, Devon estimates that it has restored approximately 60%, or 30,000 boe/d, of its pre-hurricane oil and natural gas production level of 50,000 boe/d in the Gulf of Mexico. It said it expects to restore another 5,000 boe/d of offshore production during the fourth quarter as repairs are made to production facilities and transportation systems. But Devon noted that 1,200 boe/d of offshore produce will be curtailed indefinitely because of Hurricane Ike, which toppled two of the company's platforms in the Eugene Island area.

Devon's remaining shut-in Gulf production (about 14,800 boe/d), about half of which is oil and half of which is natural gas, is scheduled to be restored in 2009 as third-party facilities are repaired, it said. The onshore oil and gas production that was curtailed in the third quarter following Hurricane Ike (600,000 boe/d) has been restored, the company reported.

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